From PLI’s Course Handbook

What Lawyers Need to Know About UCC Article 9: Secured Transactions 2009

#18775

10

Perfecting a security

interest in a New York

cooperative apartment

Sandra Stern

Nordquist & Stern PLLC


SANDRA STERN

Nordquist & Stern PLLC

909 Third Avenue

Fifth Floor

New York, NY 10022

(212) 207-8150

Perfecting a Security Interest in a New York Cooperative Apartment

(1) Where Do I Find the Law? These provisions are unique to New York. Unfortunately, they are scattered throughout the New York version of Article 9, and not located in one place. The only way to make sure that you have all of them is to download a complete copy of New York’s version of Article 9. They are generally not included in standard texts that reprint Article 9.

(2) What is the Article 9 Collateral Category? This is a separate collateral category that encompasses both the owner’s rights under the lease and the shares in the cooperative association.

Article 9 as enacted in New York created new terminology to describe the interests held by the owner (and, thereafter, the secured lender) and the cooperative association. What the owner (and subsequently the secured party) has is a “cooperative interest.” A cooperative interest is defined as:

an ownership interest in a cooperative organization, which interest, when created, is coupled with possessory rights of a proprietary nature in identified physical space in this state belonging to the cooperative organization.[1]

The description does not refer specifically to components of the cooperative interest, such as the lease and the shares of stock in the association. While practitioners who have traditionally described the security interest in terms of the stock and lease may be tempted to embellish the definition, such embellishment is, for the most part, unnecessary, unless it is possible that the laws of a jurisdiction other than New York could apply.[2]

Article 9 treats the cooperative interest as personalty rather than realty.

(3) Distinguishing the Owner’s Interest from the Coop’s Interest This cooperative interest is to be distinguished from the security interest held by the cooperative organization (which may exist for unpaid assessments and maintenance charges):

“Cooperative organization security interest” means a security interest which is in a cooperative interest, is in favor of the cooperative organization, is created by the cooperative record, and secures only obligations incident to ownership of that cooperative interest.[3]

In practice, lenders to purchasers of cooperative apartments were generally required under former Article 9 to subordinate their security interests to the security interest of the cooperative association. The New York amendments codify this practice by providing that the security interest of the cooperative association has priority over the security interest of the lender, irrespective of the time when either arose,[4] and, second, that the cooperative association’s security interest “becomes perfected when the cooperative interest first comes into existence and remains perfected so long as the cooperative interest exists.”[5] Accordingly, no filing is required.[6]

(4) How does a Lender Perfect its Security Interest? As to the lender’s security interest, filing is both required and is the exclusive means of perfection.[7] As a consequence, neither a recording of documents other than the financing statement on the real estate records nor possession of the share certificates in the cooperative association is effective to perfect a security interest.

In a security agreement, a description of the collateral by UCC type alone is an insufficient description of a security interest in a cooperative apartment.[8] The cooperative interest must be specifically described by location.

(5) Where should the filing be made? Under Rev. UCC 9-501(a)(1)(C), the place is the office designated for the filing or recording of a mortgage on the related real property. In most cases, the debtor will be located where the cooperative apartment is located. However, when these jurisdictions differ, the New York amendments provide that the filing is to be made in the jurisdiction where the apartment is located—that is, in New York State.[9]

(6) What is the Cooperative Addendum and Should I use It? The New York amendments contemplate the use of a “cooperative addendum” to the financing statement that provides additional information concerning the apartment.

The filer should always use a cooperative addendum because: (a) a filing with the addendum will be effective for fifty years, rather than the normal five-year period:

An initial financing statement covering a cooperative interest is effective for a period of 50 years after the date of the filing of the initial financing statement if a cooperative addendum is filed simultaneously with the initial financing statement or is filed as an amendment before the financing statement lapses.[10]

(b) Part of the collateral here is the certificate representing the shares held in the cooperative association. This is a security. Generally, a filed financing statement does not constitute notice of an adverse claim to a security certificate. If the secured party manages to lose the shares, a purchaser could conceivably be a protected purchaser and take free of the adverse claim. Under 9-516(e), however, a filing including a cooperative addendum does constitute notice of an adverse claim.

Conclusion: there is no downside, and every advantage, in using the cooperative addendum.

(7) The Lender’s Duties as an Article 9 Secured Party. Because security interests in cooperative apartments are subject to Article 9, both lenders and cooperative associations will have to follow the rules governing disposition after default in Part 6 of Article 9. Also, because cooperative apartments are generally purchased for personal, family, or household purposes, such persons will also have to follow the additional Part 6 rules governing consumer transactions. The existence of these rules may be a surprise to lenders that view cooperative interests as quasirealty, but it is a consequence of bringing these interests firmly within the Article 9 framework.

One of the most important of these is Rev. UCC 9-626, which establishes certain rules in the event that a deficiency or surplus is at issue after disposition of the collateral. Because Rev. UCC 9-626 applies only to commercial transactions, however, courts are free (in accordance with the last subsection thereof) to determine the proper rules in consumer transactions without reference to Rev. UCC 9-626. These court-created rules may penalize the noncomplying lender more severely than the rules set forth in Rev. UCC 9-626.

Although Rev. UCC 9-626 (and its exclusion for consumer transactions) applies to every secured transaction, it is more likely to be invoked in disputes arising after the disposition of cooperative apartments. These are relatively high-ticket assets that may represent a significant portion of a person’s net worth, and disputes may arise about the commercial reasonableness of the disposition, as well as the price thereby realized. Therefore, both the lender to the owner and the cooperative association should be aware of these rules when enforcing their security interest after default.

(8) What Else Do I Need to Know? The lender should begin by searching the records for a previously filed financing statement describing the same cooperative interest. Because the requirements for a financing statement describing a cooperative interest are quite specific,[11] a financing statement indicating only that it covers “all assets” will be ineffective. Also, as the transition period has come to an end in New York, the lender will not have to worry about the continued effectiveness of a security interest that was perfected by possession under former Article 9 (and as to which information will not be disclosed during a search).

The security agreement should describe the cooperative interest specifically. Frequently, New York cooperative apartments contain additional space located outside the apartment, for example, storage bins located in a basement or an assigned parking space in an attached garage. These spaces should be described as well.

In describing an apartment with reference to its unit number, the lease should be consulted. This is because there may be situations in which the number on the door (and thus the number provided by the owner) may not correspond to the number on the lease.

As in any secured transaction, it is preferable for the lender to prefile the financing statement before the closing. Because the debtor will not have authorized the filing of the financing statement by executing the security agreement as of the date of the filing, the debtor’s express authorization should be obtained.

It is common for lenders to obtain a “recognition letter” in which the cooperative association consents to the security interest. The letter may also deal with enforcement of the cooperative association’s security interest, and obligate the cooperative association to notify the secured party if any other person attempts to obtain a similar recognition letter for its security interest. Even though the letter has been obtained, however, it is helpful to check the amount of financing to be provided by the secured lender against the requirements set forth in the association’s organizational documents. It is common for cooperative associations to limit the amount of financing that can be obtained by an owner.

2

[1]See Rev. UCC 9-102(a)(27-b).

[2] Paul Schupack and Stanley R. Simon, in their excellent book Simon’s Guide to Cooperative Associations (published by Stanley R. Simon, LLC, 112 East 19th Street, New York, NY 10003), at 8-3, identify the risk that a law other than the law of New York may apply. This risk could arise if the owner is a registered organization of another jurisdiction, or a natural person who resides elsewhere than in New York State (perhaps a legatee of the apartment, or a person who uses it as a pied-à-terre). If the laws of another jurisdiction apply, those laws would not include any reference to a “cooperative interest.” In that case, the collateral should be described both in terms of the New York terminology and with reference to the stock and lease.

[3]See Rev. UCC 9-102(a)(27-d).

[4]See Rev. UCC 9-322(h)(1).

[5]See Rev. UCC 9-308(h).

[6]See Rev. UCC 9-310(b)(11).

[7]See Rev. UCC 9-310(d).

[8]See Rev. UCC 9-108(e)(3).

[9]See Rev. UCC 9-301. This rule applies, of course, only if New York law applies in the first instance. If the debtor is located elsewhere (see supra note 157), a filing should also be made in its jurisdiction.

[10]See Rev. UCC 9-515(h).

[11] See Rev. UCC 9-502.